Confusion over BAT's China deal

British American Tobacco's hopes of becoming the first foreign firm to open a cigarette factory in China were thrown into confusion yesterday amid reports that the government regulator had not approved an operating licence as the UK firm claimed last week.

China's state tobacco monopoly administration is said to have denied that it had given the go-ahead despite a BAT announcement last Friday that it had reached agreement to build an $800m (£450m) factory with the capacity to produce 100bn cigarettes a year.

The China Daily quoted Wei Xinhua, deputy director of the administration's general office, saying: "We did not approve the project, and we are surprised to hear the report."

The administration, which serves as protector of the state monopoly as well as the industry watchdog, is to make a formal announcement on the issue this week.

But another official from the administration, Hu Xinhua, told the newspaper that the government will not approve any new factories because manufacturing capacity already exceeds demand. BAT said it was not surprised that the regulator had not heard of the approval. "We decided, for certainty and clarity, we would go to central government," a spokeswoman said. She said approval had come from the "very highest government levels".

She said the company had been in discussions for three years and BAT said it would continue to negotiate with provincial legislators over where best to locate.

Whether the comments from the tobacco regulator represent a procedural problem, ministerial in-fighting or an outright rejection of BAT's plans remains unclear. But it underscores the difficulty the UK firm has had in establishing a production base in China. With its local partner, China Eastern Investment, it has long sold leading brands such as State Express 555, which was reportedly Mao Zedong's favourite. But in an effort to get round import tariffs of up to 65%, the company has spent more than two years trying to secure agreement to establish a local production base.

· BAT's US arm, Brown & Williamson, is being sued by the attorney general of Illinois for an advertising campaign which allegedly targeted children. The state is looking for $12m in penalties and costs.